Question

The following table shows an abbreviated income statement and balance sheet for Quick Burger Corporation for...

The following table shows an abbreviated income statement and balance sheet for Quick Burger Corporation for 2016.

INCOME STATEMENT OF QUICK BURGER CORP., 2016
(Figures in $ millions)
Net sales $ 27,584
Costs 17,586
Depreciation 1,419
Earnings before interest and taxes (EBIT) $ 8,579
Interest expense 534
Pretax income 8,045
Taxes 2,816
Net income $ 5,229
BALANCE SHEET OF QUICK BURGER CORP., 2016
(Figures in $ millions)
  Assets 2016 2015 Liabilities and Shareholders' Equity 2016 2015
Current assets Current liabilities
  Cash and marketable securities 2,353 2,353 Debt due for repayment — 418
  Receivables 1,392 1,352 Accounts payable 3,420 3,160
  Inventories 139 134 Total current liabilities 3,420 3,578
  Other current assets   1,106 633
  Total current assets 4,990 4,472
Fixed assets Long-term debt 13,650 12,151
  Property, plant, and equipment 24,694 22,852 Other long-term liabilities 3,074 2,974
  Intangible assets (goodwill) 2,821 2,670 Total liabilities 20,144 18,703
  Other long-term assets 3,000 3,116 Total shareholders’ equity 15,361 14,407
  Total assets 35,505 33,110 Total liabilities and shareholders’ equity 35,505 33,110

In 2016 Quick Burger had capital expenditures of $3,066.

a. Calculate Quick Burger’s free cash flow in 2016. (Enter your answer in millions.)

b. If Quick Burger was financed entirely by equity, how much more tax would the company have paid? (Assume a tax rate of 35%.) (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)

c. What would the company’s free cash flow have been if it was all-equity financed?

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Homework Answers

Answer #1

a) We need to calculate cash flows from operations first.

Cash Flow from operations = Net income+Interest+Depreciation- Additions to net working capital

Additions to net working capita= ($1392+1391106-3420)-($1352+134+633-$3578)

= (729)-(1459) = $730

=$5229+$534+$1419-$730

=$6452

Free cash Flow = $6452-$3066 (capital expenditure)

= $3386

b)Income Statement

Net sales $27584 $27584
COGS 17586 17586
Depreciation 1419 1419
EBIT $8579 $8579
Interest Expense 0 534
Pre tax income $8579 $8045
Taxes @ 35% $3002.65 $2815.75
Net Income $5576.35 $5229.25

Additional Tax = $30002.65-$2815.75

= $186.9

c) We have already calcullated Additions to working capital = $730

Cash flow from operations here will be = net income + interest (1-tax)+depreciation - Additions to work in capital

=$5229+(534(0.65)+$1419-$730

=$6265.10

Free Cash Flows = $6265.10-$3066

= $3199.10

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